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Leasehold Mortgages on Airports – Part 1

As a continued by product of the financial crisis of the 2000s and the increase of legal information readily available in digital format, ground leaseholders are increasingly having their credit facilities subject to a leasehold mortgage. The type of on-airport service providers which find themselves bound by these types of security instruments include Fixed Base Operations (FBOs), Maintenance Repair and Overhaul (MRO) operations and Aircraft Charter and Management (ACM) operators. Basically, anyone who owns their own facilities subject to long term lease on an airport may have their financial operations impacted by a leasehold mortgage.

The Basics

As its name implies, a leasehold mortgage is similar to the mortgage on owned real property except that in this circumstance the subject property is a leasehold rather than owned fee simple. Leasehold mortgages tend to be generic for long-term leases of multi use buildings, such as offices; for airport ground leases, however, there are specific considerations given the narrow use of the property. There are inherently differing interests between the property owner/landlord (usually the airport sponsor) and the lender in whose favor the leasehold mortgage extends. The tenant is usually an FBO but sometimes another on-airport service provider who owns their own hangar. Most airports allow leasehold mortgages in the ordinary course of business as they understand that this security interest is important to a lender, and that it promotes growth on the airport through the construction of new on-airport facilities. The lease running from the airport to the tenant will usually spell out the provisions under which a leasehold mortgage may be entered into. Key provisions in an airport leasehold mortgage are notice and cure provisions as a lender will want to protect their interest in the underlying asset through being knowledgeable of and able to cure a tenants defaults while the airport, however, will want to ensure that a service provider such as an FBO will be able to operate safely and appropriately if the lender gains possession of the asset.

Importance For Airport Service Providers

The continued growth of aviation infrastructure is critical for FBOs and other airport service providers, especially those at capacity who need additional facilities for growth. In the next blog post we will discuss key provisions in leasehold mortgages that aviation infrastructure management and FBO management companies need to consider as they contemplate entering into these agreements.